Discussion about the impact (or lack thereof) of the Iranian oil bourse has gained steam in recent weeks. Jeff Vail came up with a good post on the topic late last year and has more recently been followed by a somewhat fervent article by Krassimir Petrov, an attempted debunking by James Hamilton, a discussion at PeakOil.com and most recently an article by Cóilín Nunan on Energy Bulletin.

With speculation mounting over the possibility of a US- or Israeli-led military attack of Iran sometime later this year, it has been suggested that real motivation for US antipathy towards the Iranian government has little to do with concerns that Tehran is developing nuclear weapons. Some commentators have instead suggested that Iran’s real Iranian threat to the US and its economy is that, in defiance of the US administration, it is attempting to establish an oil ‘bourse’ (exchange) in March of this year which would enable oil to be traded in euros. This would move oil sales away from their usual denomination in dollars and would, it is argued, undermine the American currency with grave consequences for the US economy.

This internet-based debate is reminiscent of what occurred before the invasion of Iraq when several observers, myself included, hypothesised that Saddam Hussein’s decision to sell Iraqi oil in euros was perhaps one of the reasons the US wanted ‘regime change’. The US decision after the invasion to return Iraqi oil sales to dollar denomination and to convert back into dollars all Iraqi foreign currency reserves, which had been in euros prior to the war, was certainly entirely consistent with this theory.

However, others have claimed that the idea that the currency in which oil is sold matters at all is based on a poor understanding of economics. If oil sales were switched away from the dollar, they claim, it would make no difference to the US economy, and therefore this cannot have anything to do with the reasons the US went to war in Iraq and is now adopting a threatening stance towards Iran. I will try and address their main argument, as I feel the economic reasons why the denomination of oil sales are is an important issue have not always been clearly explained, including by myself.

Those arguing that the denomination of sales is crucial to dollar strength have tended to say that countries are forced to save dollars so that they have dollars to buy oil. Their critics, however, reply that you do not have to save in dollars to buy oil since you can save in whichever currency you want and then buy dollars on the foreign exchange market whenever you want to buy oil. What matters, say the critics, is in which currency people ultimately save rather than in which currency they trade. It is people saving in dollars, or in US financial assets, which results in high levels of investment in the US and ultimately permits the US to run a huge trade deficit.

The latter argument is largely correct, but it leaves out the crucial fact that the reason countries choose to save in dollars, to a far greater extent than in any other currency, is nonetheless related to the fact that oil is sold in dollars. Yes, what is important is in which currency countries save, but this is to a significant extent determined by which currency they trade in...

The Guardian has a report which suggests that Britain isn't too keen on using the military option against Iran.

Though world leaders agreed that strong measures were necessary to prevent Iran gaining nuclear weapon capacity, there was little consensus this weekend [at Davos] as to what those measures should be. Jack Straw, the Foreign Secretary, yesterday conceded that Britain and the US were divided over using military force.

Responding to comments by US politicians stressing the 'leverage' the military option allowed, Straw said such action was not under discussion. 'I understand that's the American position. Our position is different There isn't a military option. And no one is talking about it.'

Britain, along with most EU states, has been pursuing a policy of 'engagement' with the Iranians. Straw was speaking ahead of talks with Mohamed ElBaradei, the head of the International Atomic Energy Agency.

JeffVail has a couple of new posts on Iran - the first looks at an unlikely report that Iran has staged a nuclear test already while the second considers the idea that the US may change tack and try to break Khuzestan (the important part that contains most of the oil) away from the rest of Iran (which I've mentioned before here and there).

Keep an eye on Khuzestan. That's the South-Western Iranian province, bordering Iraq and the Persian Gulf, that currently has a modest but growing independence movement. It was also the site of the recent bombings that Iran is blaming on UK influence. Within the US intelligence community, at least, it is widely believed that the best option for dealing with Iran is through fomenting internal unrest of some sort. The classic formula for this (see "Coup D'Etat: A Practical Handbook" by Luttwak) is to leverage existing internal devisions--and that is exactly what is happening here. The US is actively supporting this Khuzestan independence movement, and the various "Free Iran Movements" that are being supported by right-wing think tanks in D.C. have many ties to this region. Not surprisingly, Khuzestan is the major oil producing region in Iran, but the revenues don't provide much benefit to the local and ethnically distinct Arab population.

You may also recall the Iranian Embassy siege in London in 1980--also the work of the a group from Khuzestan agitating for autonomy from Tehran. So there are definitely some genuine tensions here for US exploitation. This is, of course, highly speculative, but I think it is still worth considering: the US may not need to invade all of Iran to influence their choices--they may just need to help the people of Khuzestan break away, and "help" a pro-US government set up shop.

At the minute, the most serious of the several threats facing the world's oil supply is clearly the Iranian situation. Iran's leadership is determined to start a uranium enrichment program. Tehran claims it is for electric power, but the US and Europe say "nuclear weapons." To make matters worse, nearly every major world power (and numerous minor ones) has a finger in the Iran pie either as an actual or potential customer for Iranian oil, or as a friend or foe of Tehran.

The important new factor in this crisis, however, is the lack of much spare oil production capacity anywhere in the world. There certainly is not enough to offset the 2.4 million barrels a day Iran is currently exporting. Thus, for the first time we are seeing the threat of a completely new kind of economic embargo called "who gets hurt the worst" - the world economy, or the one embargoed. Both sides are aware of this situation with Tehran threatening to send world oil prices to over $100 per barrel if anyone interferes with their enrichment program. The US spokesmen seem to be saying that we must pay any economic price to keep the Iranians from nuclear weapons.

From a peak oil point of view, however, stoppage of Iranian exports would be a seminal event. Oil prices obviously would be driven higher. Whether they get to the "serious damage" level is hard to say because so many factors go into shaping the price of oil. Given that we are very close to peak oil, it is quite possible a major stoppage of Iranian exports could play a significant part in the actual event.

The Globalist has an article by the "guru of the gap", Thomas Barnett, which looks at the Iran issue from a rather different angle to most commentators. His plan looks like something of a blueprint for removing the present regime over a longer period of time and replacing it with a relatively pro-western leadership, while giving Iran more power in regional affairs. Unlike many more fevered commentators, he notes that Iran is a nation state and like all nation states is a fairly rational actor - if they don't feel their existance is threatened they will behave much like any other mid size nuclear power.

It is Iran that can effectively veto movement toward peace and stability in either Jerusalem or Baghdad through its effective support to, and manipulation of, the political agendas of regional terrorist groups such as Hezbollah and Hamas. It is Iran that has the capacity to destabilize the flow of oil out of the Gulf.

It is Iran that determines how much of the energy coming out of the Caspian Basin may be safely accessed by both India and China. And it is Iran, which, by virtue of being a top-five player in both oil and natural gas and a longtime diplomatic pariah as far as the United States is concerned, that offers Asia the best possibilities for locking in long-term bilateral energy ties, a process already begun by India and China.

And yet, oddly enough, for all the same reasons why the Shah of Iran was once the preferred security partner of the United States in the region, today’s Iran still retains many of those same attributes.

If America wants Iran to act responsibly in the region, it needs to give Iran some responsibility for regional security.

Iran is not a source for, or a supporter of, the jihadist movement embodied by al Qaeda. As a Shiite state, its definition of “revolution” differs from that track altogether.

Iran’s Islamist regime results in a sort of tired authoritarianism, never truly aspiring to the sort of totalitarianism pursued by the Salafis, who can be thought of as the over-the-top Maoists (or Trotskyites) to Iran’s rather pedantic post-Stalin Soviet Union. Iran is a nation-state first and foremost, not some transnational religious-inspired movement.

Yes, like Brezhnev’s Soviet Union, Iran is more than willing to exploit transnational terrorist movements to its own ends, but this is a cynical pursuit of national power, not a millenarian fantasy of regional, much less global, revolution.

Iran is not interested in overthrowing the West’s political and economic order, it just wants to receive its due place in those corridors of power.

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Iran’s possession of nuclear weapons levels that playing field in a proximate sense, by finally allowing the Muslim Middle East to sit one player at the negotiating table as Israel’s nuclear equal. This is not just opportune, it is crucial.

As for the fears that Iran’s possession of the bomb will destabilize the region, there is no good historical evidence for that. Rather, the historical record is quite clear: Two relative equals with nuclear weapons is a far better equation than one that features a permanent imbalance.

Would Iran give terrorists the bomb? Only if terrorists could get Iran something that it could not otherwise achieve directly with the West.

In the past weeks rumors have circulated widely amid growing tensions around a possible bombing strike against Iran. Among the reports—in violation of all precedent since the 1945 USA bombing of Hiroshima and Nagasaki—is discussion of possible deployment of nuclear bombs by either the United States or Israel, to destroy or render useless the deep underground Iranian nuclear facilities.

The possibility of war against Iran presents a geo-strategic and geopolitical problem of far more complexity than did the bombing and occupation of Iraq. And Iraq has proven complicated enough for the United States. Below we try to identify some of the main motives of the main actors in the new drama and the outlook for possible war.

The dramatis personae include the Bush Administration, most especially the Cheney-led neo-conservative hawks in control now of not only the Pentagon, but also the CIA, the UN Ambassadorship and a growing part of the State Department planning bureaucracy under Condi Rice. It includes Iran under the new and outspoken President Mahmoud Ahmadinejad. It includes Putin`s Russia, a nuclear-armed veto member of the UN Security Council. It includes a nuclear-armed Israel, whose acting Prime Minister, Ehud Olmert, recently declared that Israel could ‘under no circumstances’ allow Iranian development of nuclear weapons ‘that can threaten our existence.’ It includes the EU, especially Security Council Permanent Member, France and the weakening President Chirac. It includes China, whose dependence on Iranian oil and potentially natural gas is large.

Each of these actors has differing agendas and different goals, making the issue of Iran one of the most complex in recent international politics. What’s going on here? Is a nuclear war, with all that implies for the global financial and political stability, imminent? What are the possible and even probable outcomes?

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The role of Putin’s Russia in the unfolding Iran showdown is central. In geopolitical terms, one must not forget that Russia is the ultimate ‘prize’ or endgame in the more than decade long US strategy of controlling Eurasia and preventing any possible rival from emerging to challenge US hegemony.

Russian engineers and technical advisers are in Iran constructing the Bushehr nuclear plant, at least 300 Russian technicians. Iran has been a strategic cooperation partner of the Putin government in terms of opposing US-UK designs for control of Caspian oil. Iran has been a major purchaser of Russian military hardware since the collapse of the Soviet Union, in addition to buying Russian nuclear technology and expertise.

In March 2005 Iran-Russian relations took a qualitative shift closer. That month Moscow agreed to the sale of a ‘defensive’ missile system to Tehran, worth up to $7 billion-worth of future defense contracts. In 2000 Putin had announced Russia would no longer continue to abide by a secret US-Russia agreement to ban Russian weapons sales to Iran that the government of Boris Yeltsin had concluded. Since then, Russian-Iranian relations have become more entwined to put it mildly.

Moscow currently says it is in talks with Iran to build five to seven additional nuclear power reactors on the Bushehr site after completion of the present reactor. Russia expects to get up to $10 billion from the planned larger Bushehr reactors deal and additional arms sales to Iran. It is currently building the reactor on credit to be paid by Iran only after the completion of the project. Sanctions and admonitions will not change Russia's relationship with one of the most demonized states in America's ‘axis of evil.’ Iran has become a major counterweight for Moscow in the geopolitical game for Washington’s total domination over Eurasia, and Putin is shrewdly aware of that potential.

A look at the map (see below), will reveal how geo-politically strategic Iran is for Russia, as well as for Israel and the USA. Iran controls the strategic Strait of Hormuz, the choke point for oil from the Persian Gulf to Japan and the rest of the world. Iran borders the oil-rich Caspian Sea as it does NATO member Turkey.

Significantly, on January 23, the Russian daily, Kommersant reported that Armenia, sandwiched between Iran and Georgia, had agreed to sell 45% control of its Iran-Armenia gas pipeline to Russia’s Gazprom. The Russian daily added, ‘If Russia takes over this [Iran-Armenia] pipeline, Russia will be able to control transit of Iranian gas to Georgia, Ukraine and Europe.’ That would be a major blow to the series of Washington operations to insert US-friendly pro-NATO governments in Georgia as well as Ukraine. It would also bind Iran and Russian energy relations. While the Armenian government denies they have agreed, negotiations continue with Gazprom holding out the prospect of demanding double the price or $110 per 1000 cubic meters rather than the present $54 unless Armenia agree to sell the stake to Gazprom.

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Were the Bush-Cheney-Rumsfeld axis to risk launching a nuclear strike on Iran, given the geopolitical context, it would mark a point of no return in international relations. Even with sagging popularity, the White House knows this. The danger of the initial strategy of pre-emptive wars is that, as now, when someone like Iran calls the US bluff with a formidable response potential, the US is left with little option but to launch the unthinkable-nuclear first strike.

There are saner voices within the US political establishment, such as former NSC heads, Brent Scowcroft or even Zbigniew Brzezinski, who clearly understand the deadly logic of Bush’s and the Pentagon hawks’ pre-emptive posture. The question is whether their faction within the US power establishment today is powerful enough to do to Bush and Cheney what was done to Richard Nixon when his exercise of Presidential power got out of hand.

What strikes me about the crisis is that under the terms of the NPT Iran (like other countries) has the right to a nuclear energy program, including the enrichment of uranium. And so far, there is no indication that Iran is in breach of the treaty. The current demands by the US are superfluous to the treaty. The US and its client state Israel are openly and repeatedly threatening war against Iran, including nuclear war. This only makes sense in imperialist and hegemonic terms - naturally a regional hegemonic rival would want to be eliminated. But it does NOT make sense in terms of peace, security and international law (not to mention morality). Ideally, Iran should not develop nuclear weapons (or even a nuclear energy program). But were it to do so, while it would certainly change and perhaps change decisively the regional hegemonic equation, it would not necessarily increase of itself the risk of nuclear or conventional war. In fact it might even reduce the risk because it is a deterrent. We have learned to live with nukes.

However the US, instead of being condemned by the world community for this threatening behaviour, is effectively being backed and supported, even by the Russians who it appears might agree with the demand that nuclear enrichment be done in Russia but not Iran. Iran for its part has insisted on its right under the NPT and has threatened retaliation if it is attacked. Iran is being backed into a corner. Iran feels that the US has been weakened by the Iraq war and it should press its advantage. The US knows it has been weakened by the war and feels the pressure to deal with Iran while it still has a limited capacity or opportunity to do so. It is a dangerous game of brinkmanship which could lead to a miscalculation and consequent disaster, ie war.

With regard to anyone who thinks that the imminent Iranian Oil Bourse and its global currency ramifications aren't really significant factors for either the US/UK-run oil markets or US economic sanctity, please see the following inter-department communication from the US Treasury, circa 1978:

"...confidence in the dollar remains fragile. Recent and more frequent news reports regarding OPEC's growing disenchantment with use of [the] dollar for oil pricing further disturb the market. If OPEC changed the unit of accounting for oil pricing it ciould precipitate a major market reaction which would be in the interest neither of the Saudis, other OPEC members, nor the US."

There’s also this ditty, which might in part explain why people discount to the public the issues related above between government officials:

“The Monday evening news on the networks tells people how much the Dow Jones Industrial averages went up or down that day, but not … the rates at that day’s weekly auction of U.S. Treasury bills – though the money spent to buy the Treasury bills at this one weekly auction exceeds the total trading in the Dow in the entire 31.5 hours that the market is open each week.”